An Extremely Rational Bubble

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It just makes sense that the failure of Facebook to spectacularly IPO would affect all markets public and private right?

But especially the companies, public or private, that are contingent upon, tethered to, Facebook … like well Zynga, and Quora and Fab and most social Consumer Internet startups really.

So, as someone who has no idea what money she has and where it is invested, please don’t pay attention to any financial advice I may have … I clearly have no idea what I’m talking about.

BUT (big ‘but’) … We just had Paul Graham write an email that many have already deemed to be “RIP Good Times” part deux to his portfolio companies. And you should pay attention, because who’s smarter than Paul right? No one that I know of.

But (smaller ‘but’), all is not lost, as I’ve spent all day chasing down the fact that companies who are real businesses stand to benefit from the current expected suppression in private market funding, if (caveat) they are actually a business.

And, because of a standard lag time in perception, if you are raising funding and still haven’t figured everything out, you still have about six months to raise all you can. Investors have been holding cash waiting for valuations to go down apparently. So yeah, fyi.

And yes, we’re not in a bubble, we’re actually in some sort of meta-bubble where our extreme concern about being in a bubble actually prevents us from being in a bubble. It’s bubbleception. Enjoy.

And, for some perspective: I for one am really grateful to even have a job in this shit, because half the people my age in my home country of Greece don’t. And that is the whole problem right there (Greece is more of a worry for both public and private investors than Facebook I’m hearing).

FFS someone smarter than me fix this.

Graham’s entire email below.

Jessica and I had dinner recently with a prominent investor. He seemed sure the bad performance of the Facebook IPO will hurt the funding market for earlier stage startups. But no one knows yet how much. Possibly only a little. Possibly a lot, if it becomes a vicious circle.What does this mean for you? If it means new startups raise their first money on worse terms than they would have a few months ago, that’s not the end of the world, because by historical standards valuations had been high.

Airbnb and Dropbox prove you can raise money at a fraction of recent valuations and do just fine. What I do worry about is (a) it may be harder to raise money at all, regardless of price and (b) that companies that previously raised money at high valuations will now face “down rounds,” which can be damaging.What to do?If you haven’t raised money yet, lower your expectations for fundraising. How much should you lower them? We don’t know yet how hard it will be to raise money or what will happen to valuations for those who do.

Which means it’s more important than ever to be flexible about the valuation you expect and the amount you want to raise (which, odd as it may seem, are connected). First talk to investors about whether they want to invest at all, then negotiate price.If you raised money on a convertible note with a high cap, you may be about to get an illustration of the difference between a valuation cap on a note and an actual valuation. I.e. when you do raise an equity round, the valuation may be below the cap. I don’t think this is a problem, except for the possibility that your previous high cap will cause the round to seem to potential investors like a down one. If that’s a problem, the solution is not to emphasize that number in conversations with potential investors in an equity round.

If you raised money in an equity round at a high valuation, you may find that if you need money you can only get it at a lower one. Which is bad, because “down rounds” not only dilute you horribly, but make you seem and perhaps even feel like damaged goods.

The best solution is not to need money. The less you need investor money, (a) the more investors like you, in all markets, and (b) the less you’re harmed by bad markets.

I often tell startups after raising money that they should act as if it’s the last they’re ever going to get. In the past that has been a useful heuristic, because doing that is the best way to ensure it’s easy to raise more. But if the funding market tanks, it’s going to be more than a heuristic.

The startups that really get hosed are going to be the ones that have easy money built into the structure of their company: the ones that raise a lot on easy terms, and are then led thereby to spend a lot, and to pay little attention to profitability. That kind of startup gets destroyed when markets tighten up. So don’t be that startup. If you’ve raised a lot, don’t spend it; not merely for the obvious reason that you’ll run out faster, but because it will turn you into the wrong sort of company to thrive in bad times.